A former Citigroup ( C) broker pleaded guilty Friday to a criminal charge arising from the so-called squawk box trading-tips scandal, amid indications that federal prosecutors are expanding their investigation. Ralph Casbarro pleaded guilty in federal court in Brooklyn, N.Y., to one count of conspiracy to commit securities fraud. In August, a
federal grand jury indicted Casbarro on charges that he participated in an illegal scheme to permit daytraders to listen in to the internal "squawk box" system used by Citigroup's institutional trading desk. Indicted with Casbarro were Timothy O'Connell and Kenneth Mahaffy Jr., two former Merrill Lynch ( MER) brokers, and David Ghysels, a former Lehman Brothers ( LEH) broker. Mahaffy most recently had worked at Citigroup before being let go when the scandal broke this spring. The eavesdropping allegedly allowed the daytraders at AB Watley and Millennium Brokerage to get valuable information about big block trades by institutional customers. Prosecutors contend the daytraders used the squawk boxes to gather information to engage in front-running, an illegal practice in which a person buys or sells shares ahead of a trade he suspects will move a stock's price. In return for the access, the daytraders allegedly paid bribes in the form of cash or trading commissions, after generating at least $650,000 in gross profit from June 2002 through September 2003. Casbarro's attorney, Larry Iason, would not comment on whether his client was cooperating with the investigation. Casbarro is scheduled for sentencing on Dec. 20. People familiar with the investigation say the timing of Casbarro's guilty plea is curious because it comes amid reports that investigators have questioned other Citigroup brokers who at one time had access to similar institutional trading squawk boxes. Investigators are trying to determine whether other brokers made a regular practice of sharing trading tips with daytrading firms and hedge funds.
Indeed, dozens of retail brokers at Citigroup may have had access to an institutional trading squawk box before the firm pulled the system out of those brokers' offices about a year ago, sources say. Some brokers even were given access to the squawk boxes used by the bank's bond traders to communicate with each other. Casbarro himself has claimed it was "common practice" at the Citigroup mid-Manhattan office where he worked for brokers to have access to the firm's trading squawk boxes. On his broker registration statement, Casbarro said "management knew and gave blessing" to the practice. A Citigroup spokeswoman wasn't immediately available for comment. Citigroup wasn't alone in giving retail brokers access to the squawk boxes used by institutional traders. TheStreet.com has previously reported that more than a hundred brokers at Merrill Lynch may have had access to the kind of trading squawk boxes Mahaffy and O'Connell used in the firm's Garden City, N.Y. office. In December 2003, Merrill Lynch removed the squawk boxes from those other brokers' offices because it believed the potential for abuse was too great. Merrill Lynch began the investigation after receiving an anonymous tip that some brokers were misusing the firm's squawk-box system. Around that same time, regulators from the NASD also notified Merrill Lynch that they discovered some day traders at Millennium had been given access to the firm's squawk box system. Investigators have questioned at least one other broker in the Merrill Lynch office who had access to a squawk box like O'Connell and Mahaffy, sources say. O'Connell, Mahaffy and Ghysels each pleaded innocent in August. The Securities and Exchange Commission also has filed civil fraud charges against the four brokers. Casbarro is the third person to plead guilty in the investigation. In July, Benjamin Grimaldi, a former senior compliance officer with Merrill Lynch, pleaded guilty to a witness tampering charge in connection with the investigation. Grimaldi tried to put pressure on O'Connell's assistant, Irene Santiago, to lie to the grand jury. Santiago has pleaded guilty to an obstruction of justice charge in the case.
The squawk box investigation began in the spring of 2004. A big break in the case came when prosecutors indicted John Amore, the former Watley CEO, on an unrelated securities offense. Amore, who is believed to be cooperating with prosecutors, was the mastermind of the squawk box scheme at Watley. Amore used Watley's access to Merrill Lynch's squawk box system as a recruiting tool in wooing skilled daytraders to the firm. While the SEC has filed civil fraud charges against Amore, prosecutors have never confirmed his involvement in the investigation. People familiar with Amore say the former Watley executive had justified the practice, saying it was common for hedge funds to get tips on big block trades from brokers. In fact, in a related investigation, prosecutors found that a former New York Stock Exchange floor clerk had been providing trading tips to Amore several years before he came to Watley, while Amore was a daytrader at Andover Brokerage in Great Neck, N.Y. Last month the former clerk, Frank Furino, pleaded guilty to charges he provided illegal stock tips in a front-running scheme that generated more than $300,000 in illicit profits for Amore. Again, prosecutors did not identify Amore by name in the Furino prosecution. But Douglas Burns, Furino's lawyer, confirmed that Amore was the recipient of the trading information.